Valuing companies is an art and not a science. There are three main factors that buyers always take into account.
Quality of the Earnings
One of the key things that buyers look for is the quality of earnings. This means that the accountants and intermediaries in the transaction provide clean, documented financials. For example, is all income accounted for, and do all expenses truly support the business? Have the books been balanced and reviewed by a CPA? Have all non-recurring expenses been explained? Here are a few examples of non-recurring expenses:
- Meeting some new governmental guidelines,
- Paying for a major lawsuit, or
- Adding a new roof to the warehouse.
Buyers often look for a company with a stable and consistent income. You can see it through financial statements and tax returns. Buyers also want to see a healthy profit margin. This indicates that the company is doing well and has room to grow. Buyers may look for a solid customer base and a good reputation in the community.
Sustainability of Earnings
Ensure that your company is sustainable in the long term. Regardless of who owns the company, you need to be able to continue generating earnings at a steady rate. So when you’re approached by potential buyers, be sure to ask them about their plans for sustainability. This will help you make an informed decision about whether or not to sell.
Verification of Information
Assure that all of the information you provide is accurate and timely. This includes potential litigation, environmental issues, product returns, and uncollectible receivables. If handled professionally, these areas can create a favorable impression for potential buyers. They may also lead to a higher price and a quicker closing.
In addition to these three factors, another main factor we will want to discuss is how reliant the business is on YOU. How easy would it be for a new owner to replace you? This becomes difficult for many small business owners who are at a stage where they are still the face of the business. Our team is prepared to help you navigate through the best way to increase the value of your business while deciding when the RIGHT time to offer your business for sale might be.